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Cepheid's Preliminary 3Q Disappoints

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After reporting a disappointing second quarter 2012, Cepheid’s (CPHD - Analyst Report) preliminary results for the third quarter of 2012 were also below the consensus estimate. The company is likely to report revenues in the range of $79−$81 million, while the current Zacks Consensus Estimate stands at $84 million for the third quarter. As per the Zacks Consensus Estimate, Cepheid is expected to report earnings of 3 cents per share in the quarter.

The shortfall in revenues was primarily due to delay in the supply of Xpert cartridge parts. Although Cepheid is addressing the issue, order backlog at the end of the quarter would be approximately $5 million, which will be shipped by October. As the demand for the Xpert family of tests surged, the company failed to maintain production at the required level.

Excluding the supply related issued, Cepheid could report revenues in the range of $84−$86 million. We are impressed to note that the company recorded strong contribution from the High Burden Developing Country program following the first buy-down agreement in early August.

Based on Cepheid’s agreement with the Bill & Melinda Gates Foundation, the United States President's Emergency Plan for AIDS Relief, the United States Agency for International Development and UNITAID, the price of Xpert MTB/RIF (the tuberculosis diagnostic test) was reduced to $9.98 per test (from $16.86), the difference being funded by the collaborators. However, commercial system sales in the US remained weak due to a challenging environment.

The outlook for 2012 was reiterated at $333−$347 million. Cepheid will provide an update on its earnings guidance during the third quarter conference call, scheduled on October 18. The current Zacks Consensus Estimate for 2012 stands at 2 cents per share.

At the end of the second quarter, the EPS guidance was lowered for the second time in the year to 0−4 cents from the previous level of 12−17 cents. At the end of fiscal 2011 Cepheid had projected EPS of 17−24 cents for 2012.

In another development, a settlement has been reached with Abaxis (ABAX - Analyst Report) regarding patent litigation.  As part of the agreement, Cepheid will pay Abaxis $17.25 million in return of which, all claims against it in the pending litigation have been dropped.

We have a ‘Neutral’ recommendation Cepheid. The stock retains a Zacks #3 Rank (Hold) in the short term.

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